Hmo Revises Earnings For Second Year In Row

Hmo Revises 1991 Earnings Figure

ConnectiCare Inc., a Farmington-based HMO, has slashed its previously reported profits for the second year in a row because of accounting problems.

The state's health maintenance organizations do not often restate earnings -- certainly not two years running -- and ConnectiCare is considered by regulators to be a well-run HMO.

ConnectiCare says it has corrected the problems that led to inflated earnings.

A year ago, ConnectiCare had to revise the $3.3 million of profits it reported for 1990 down to $1.4 million.

Now, ConnectiCare says its net profits for 1991 were $1.5 million, instead of the $2.5 million originally reported on March 1.

"This is the last act of a play that began last spring," said Charles Kuchenbrod, executive vice president.

The problem detected last spring was that the HMO was not keeping track of expenses related to members who are on Medicare.

For members of all ages, the HMO has to estimate the cost of claims that have not been filed yet, though services have already been provided. In making those estimates, ConnectiCare was systematically overlooking such claims for Medicare members.

That problem was detected by the HMO's former accountants, Coopers & Lybrand, in an audit of 1990 financial results, and was solved, Kuchenbrod said.

But this year, the HMO's new auditors, KPMG Peat Marwick, convinced ConnectiCare that it had a flawed method of estimating claims not yet received, Kuchenbrod said.

"You're looking at past experience to project into the future," Kuchenbrod said. "The system only works if the future is like the past, which it never is. The system is prone to error."

So ConnectiCare switched to a more conservative method of estimating claims.

"We are comfortable now that the root causes of the problems have been addressed," Kuchenbrod said. "Even with the adjustment to our net worth, we are still a financially sound company" with a net worth well above what the state requires, he added.

Net worth -- the difference between assets and liabilities --

is a financial cushion. The restated net worth for Dec. 31, 1991, is about $5.8 million, compared with the previously reported $6.8 million.

Kuchenbrod said ConnectiCare last year replaced its auditors of 10 years -- Coopers & Lybrand -- because the HMO thought it could benefit by having new people take a fresh look at the accounting systems.

The HMO believed that the problem that Coopers & Lybrand found in the audit of 1990 results should have been caught in the 1989 audit, Kuchenbrod said. The accounting firm, he said, disagreed.

John T. Baily, partner in Coopers & Lybrand's Hartford office, said he was not aware of the disagreement. He said ConnectiCare had told his firm it was pleased with its services.

When the HMO considered changing accounting firms, Baily said, it invited Coopers & Lybrand, along with others, to make a proposal. Coopers & Lybrand did, but Peat Marwick was chosen.

ConnectiCare's problem of overlooking Medicare members' claims, Baily said, was a very small one in 1989 -- maybe several hundred thousand dollars at an HMO that reported $159 million in revenues last year.

It's easy to say in hindsight that the problem should have been caught earlier, but it was "a very subtle, buried" one, Baily said.

The problem grew and was detected in the audit of 1990 results.

ConnectiCare reported $699,031 of profits for the first quarter of 1992. That compares with $234,843, an estimate for the first quarter of 1991 after restatement of results.